Question
A company plans to add a new molding machine that will double the output of their existing facility. The cost of the new machine is
A company plans to add a new molding machine that will double the output of their existing facility. The cost of the new machine is $20,000. The machine setup fee is $2,000. With this purchase, current assets must increase by $5,000 and current liabilities will increase by $3,000. The economic life of the new machine is four years, and it falls under the MACRS three-year depreciation schedule. The machine is expected to be obsolete at the end of the fourth year and have no salvage value. They anticipate recouping 100 percent of the additional investment in net working capital at the end of year 4. Sales are expected to increase by $20,000 each year in years 1 and 2. By year 3, the Brenners expect sales to be mostly from repeat customers purchasing replacements instead of sales to new customers. Therefore, the increase in sales for years 3 and 4 is estimated to only be $10,000 in each year. The increase in operating expenses is estimated to be 20 percent of the annual change in sales. Assume the marginal tax rate is 40 percent.
Question: Calculate the initial net incremental cash flow.
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